UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Quarterly Period Ended: September 30, 2019
or
☐ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File No. 001-38247
AYTU BIOSCIENCE, INC.
(www.aytubio.com)
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Delaware
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47-0883144
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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373 Inverness Parkway, Suite 206
Englewood, Colorado 80112
(Address of principal executive offices, including zip
code)
(720) 437-6580
(Registrant’s telephone number, including area
code)
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes ☐ No
☒
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common
Stock, par value $0.0001 per share
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AYTU
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The
NASDAQ Stock Market LLC
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As of
November 1, 2019, there were 20,733,052 shares of Common Stock
outstanding.
AYTU BIOSCIENCE, INC. AND SUBSIDIARY
FOR THE QUARTER ENDED SEPTEMBER 30, 2018
INDEX
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Page
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PART I—FINANCIAL INFORMATION
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PART II—OTHER INFORMATION
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking
statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, or the Exchange Act. All statements other
than statements of historical facts contained in this Quarterly
Report, including statements regarding our anticipated future
clinical and regulatory events, future financial position, business
strategy and plans and objectives of management for future
operations, are forward-looking statements. Forward looking
statements are generally written in the future tense and/or are
preceded by words such as “may,” “will,”
“should,” “forecast,” “could,”
“expect,” “suggest,” “believe,”
“estimate,” “continue,”
“anticipate,” “intend,” “plan,”
or similar words, or the negatives of such terms or other
variations on such terms or comparable terminology. Such
forward-looking statements include, without limitation: the planned
expanded commercialization of our products and the potential future
commercialization of our product candidates, our anticipated future
cash position; our plan to acquire additional assets; our
anticipated future growth rates; anticipated
sales increases; anticipated net revenue increases;
amounts of certain future expenses and
costs of goods sold; anticipated
increases to operating expenses, research and development expenses,
and selling, general, and administrative expenses; and
future events under our current and potential future
collaborations. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions, including without
limitation the risks described in “Risk Factors” in
Part I, Item 1A of our most recent Annual Report on Form
10-K, and in the reports we file with the Securities and Exchange
Commission. These risks are not exhaustive. Moreover, we operate in
a very competitive and rapidly changing environment. New risk
factors emerge from time to time and it is not possible for our
management to predict all risk factors, nor can we assess the
impact of all factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. Forward-looking statements should not be relied upon as
predictions of future events. We can provide no assurance that the
events and circumstances reflected in the forward-looking
statements will be achieved or occur and actual results could
differ materially from those projected in the forward-looking
statements. We assume no obligation to update or supplement
forward-looking statements, except as may be required under
applicable law.
This
Quarterly Report on Form 10-Q includes trademarks, such as Aytu,
Natesto, Tuzistra, ZolpiMist, and MiOXSYSwhich are protected under
applicable intellectual property laws and we own or have the rights
to. Solely for convenience, our trademarks and trade names referred
to in this Quarterly Report on Form 10-Q may appear without the
® or
TM
symbols, but such references are not intended to indicate in any
way that we will not assert, to the fullest extent under applicable
law, our rights to these trademarks and trade names.
PART
I—FINANCIAL INFORMATION
Item 1.
Consolidated
Financial Statements
AYTU BIOSCIENCE, INC. AND
SUBSIDIARY
Consolidated Balance Sheets
See the
accompanying Notes to the Consolidated Financial
Statements
AYTU BIOSCIENCE, INC. AND
SUBSIDIARY
Consolidated Statements of Operations
(unaudited)
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Three Months Ended
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September 30,
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2019
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2018
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Revenues
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Product
revenue, net
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$1,439,826
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$1,431,809
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Operating expenses
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Cost
of sales
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375,720
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410,959
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Research
and development
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78,020
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155,878
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Selling,
general and administrative
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5,146,443
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3,576,580
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Selling,
general and administrative - related party
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–
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253,709
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Amortization
of intangible assets
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575,117
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451,957
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Total
operating expenses
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6,175,300
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4,849,083
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Loss
from operations
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(4,735,474)
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(3,417,274)
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Other (expense) income
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Other
(expense), net
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(195,386)
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(76,561)
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Gain
from warrant derivative liability
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1,830
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47,352
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Total
other (expense) income
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(193,556)
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(29,209)
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Net loss
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$(4,929,030)
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$(3,446,483)
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Weighted
average number of common shares outstanding
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15,325,921
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1,759,824
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Basic
and diluted net loss per common share
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$(0.32)
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$(1.96)
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See the
accompanying Notes to the Consolidated Financial
Statements
AYTU BIOSCIENCE, INC. AND
SUBSIDIARY
Consolidated Statement of Stockholders’ Equity
(unaudited)
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Preferred Stock
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Common Stock
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Additional paid-in
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Accumulated
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Total Stockholders'
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Shares
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Amount
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Shares
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Amount
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capital
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Deficit
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Equity
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BALANCE
- June 30, 2019
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3,594,981
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$359
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17,538,071
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$1,754
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$113,475,205
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$(106,389,500)
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$7,087,818
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Stock-based
compensation
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–
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–
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–
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–
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165,171
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–
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165,171
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Preferred
stock converted in common stock
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(443,833)
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(44)
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443,833
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44
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–
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–
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–
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Net
loss
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–
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–
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–
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–
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–
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(4,929,030)
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(4,929,030)
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BALANCE
- September 30, 2019
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3,151,148
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$315
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17,981,904
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$1,798
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$113,640,376
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$(111,318,530)
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$2,323,959
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See the
accompanying Notes to the Consolidated Financial
Statements
AYTU BIOSCIENCE, INC. AND
SUBSIDIARY
Consolidated Statements of Cash Flows
(unaudited)
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Three
Months End
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September
30,
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2019
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2018
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Operating Activities
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Net
loss
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$(4,929,030)
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$(3,446,483)
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Adjustments
to reconcile net loss to cash used in operating
activities:
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Depreciation,
amortization and accretion
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869,312
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556,807
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Stock-based
compensation expense
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165,171
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152,114
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Derivative
income
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(1,830)
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(47,352)
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Changes
in operating assets and liabilities:
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Decrease
(increase) in accounts receivable
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35,359
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(181,274)
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Decrease
in inventory
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59,340
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28,870
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Decrease
(increase) in prepaid expenses and other
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384,582
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(296,971)
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Increase
(decrease) in accounts payable and other
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276,917
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(7,889)
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Increase
in accrued liabilities
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3,441
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242,969
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Increase
in accrued compensation
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152,911
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256,174
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(Decrease)
in deferred rent
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(3,990)
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(1,450)
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Net
cash used in operating activities
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(2,987,817)
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(2,744,485)
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Investing Activities
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Deposit
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–
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2,888
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Purchases
of fixed assets
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–
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(6,065)
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Contingent
consideration payment
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(42,103)
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–
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Note
receivable
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(1,000,000)
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–
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Purchase
of assets
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–
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(300,000)
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Net
cash used in investing activities
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(1,042,103)
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(303,177)
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Financing Activities
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Net
cash provided by financing activities
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–
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–
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Net
change in cash, restricted cash and cash equivalents
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(4,029,920)
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(3,047,662)
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Cash,
restricted cash and cash equivalents at beginning of
period
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11,294,227
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7,112,527
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Cash,
restricted cash and cash equivalents at end of period
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$7,264,307
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$4,064,865
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Supplemental disclosures of cash and non-cash investing and
financing transactions
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Cash
paid for interest
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$3,390
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$–
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Fair
value of right-to-use asset and related lease liability upon
adoption of Topic 842 - Leases
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412,691
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–
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Contingent
consideration included in accounts payable
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3,430
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–
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Acquisition
costs included in accounts payable
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59,014
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–
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Exchange
of convertible preferred stock into common stock
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$44
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$–
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See the
accompanying Notes to the Consolidated Financial
Statements
AYTU BIOSCIENCE, INC. AND
SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
1. Nature
of Business, Financial Condition, Basis of
Presentation
Nature of Business. Aytu BioScience,
Inc. (“Aytu”, the “Company” or
“we”) was incorporated as Rosewind Corporation on
August 9, 2002 in the State of Colorado. Aytu was
re-incorporated in the state of Delaware on June 8, 2015. Aytu
is a specialty pharmaceutical company focused on global
commercialization of novel products addressing significant medical
needs such as hypogonadism (low testosterone), cough and upper
respiratory symptoms, insomnia, and male infertility and plans to
expand opportunistically into other therapeutic areas.
The
Company is currently focused on commercialization of four products,
(i) Natesto®, a testosterone replacement therapy, or TRT, (ii)
Tuzistra® XR, a codeine–based antitussive, (iii)
ZolpiMist™, a short-term insomnia treatment and (iv),
MiOXSYS®, a novel in vitro diagnostic system for male
infertility assessment. In the future the Company will look to
acquire additional commercial-stage or near-market products,
including existing products we believe can offer distinct clinical
advantages and patient benefits over existing marketed products.
The management team’s prior experience has involved
identifying both clinical-stage and commercial-stage assets that
can be launched or re-launched to increase value, with a focused
commercial infrastructure specializing in novel, niche
products.
Financial Condition. The
Company’s operations have historically consumed cash and are
expected to continue to require cash, but at a declining rate.
Revenues for the three-months ended September 30, 2019 slightly
increased compared to the three-months ended September 30, 2018,
and revenues increased 100% and 14% for each of the years ended
June 30, 2019 and 2018, respectively. Revenue is expected to
continue to increase long-term, allowing the Company to rely less
on our existing cash and cash equivalents, and proceeds from
financing transactions. Cash used in operations during the
three-months ended September 30, 2019 was $3.0 million compared to
$2.7 million for the three-months ended September 30, 2018, due to
the Company’s focus on market development activities
including significant product acquisition and launch-related
activities, which consume additional cash resources.
On
October 11, 2019, the Company entered into Securities Purchase
Agreements (the “Purchase Agreement”) with two
institutional investors (the “Investors”) providing for
the issuance and sale by the Company (the “Offering”)
of $10.0 million of, (i) shares of the Company’s Series F
Convertible Preferred Stock (the “Preferred Stock”)
which are convertible into shares of common stock (the
“Conversion Shares”) and (ii) warrants (the
“Warrants”) which are exercisable for shares of common
stock (the “Warrant Shares”). The Warrants have an
exercise price equal to $1.25 and contain cashless exercise
provisions. Each Warrant will be exercisable after we obtain
stockholder approval as required by applicable Nasdaq rules
(“Shareholder Approval”) and will expire five years
from the time a registration statement covering the Conversion
Shares and Warrant Shares is declared effective by the Securities
and Exchange Commission. The closing of the sale of these
securities occurred on October 16, 2019.
The
net proceeds that the Company received from the Offering were
approximately $9.3 million. The net proceeds received by the
Company from the Offering will be used for general corporate
purposes, including working capital.
As of
the date of this Report, the Company expects its commercial costs
for its current operation to remain approximately flat or to
increase modestly as the Company continues to focus on revenue
growth through increasing product sales. The Company’s
current asset position of $31.0 million plus the proceeds expected
from ongoing product sales will be used to fund operations. The
Company will access the capital markets to fund operations if and
when needed, and to the extent it is required. The timing and
amount of capital that may be raised is dependent on market
conditions and the terms and conditions upon which investors would
require to provide such capital. There is no guarantee that capital
will be available on terms favorable to the Company and its
stockholders, or at all. However, the Company has been successful
in accessing the capital markets in the past and is confident in
its ability to access the capital markets again, if needed. Since
the Company does not have sufficient cash and cash equivalents
on-hand as of September 30, 2019 to cover potential net cash
outflows for the twelve months following the filing date of this
Quarterly Report, ASU 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40) requires the
Company to report that there exists an indication of substantial
doubt about its ability to continue as a going
concern.
If the
Company is unable to raise adequate capital in the future when it
is required, the Company can adjust its operating plans to reduce
the magnitude of the capital need under its existing operating
plan. Some of the adjustments that could be made include delays of
and reductions to commercial programs, reductions in headcount,
narrowing the scope of the Company’s commercial plans, or
reductions to its research and development programs. Without
sufficient operating capital, the Company could be required to
relinquish rights to products or renegotiate to maintain such
rights on less favorable terms than it would otherwise choose. This
may lead to impairment or other charges, which could materially
affect the Company’s balance sheet and operating
results.
Recent acquisition agreements. During
the three months ended September 30, 2019 and during the subsequent
period thereafter, the Company entered into both (i) a definitive
merger agreement (the “Merger Agreement”) between the
Company and Innovus Pharmaceuticals, Inc. (“Innovus”)
on September 12, 2019, and (ii) an asset purchase agreement (the
“Asset Purchase Agreement”) between the Company and
Cerecor, Inc. (“Cerecor”) to purchase and acquire
certain of Cerecor’s pediatric and primary care product lines
(the “Commercial Portfolio”) on October 10,
2019.
The
Merger Agreement, agreed to on September 12, 2019, by both the
Company and Innovus will cause, upon closing of the merger, for the
Company to retire all of the outstanding common stock of Innovus
for an aggregate of up to $8 million in shares of the
Company’s common stock, less certain deductions (includes
approximately $1.4 million in cash borrowed by Innovus from the
Company during this time period (see Note 10)). This initial
consideration to Innovus common shareholders is estimated to
consist of primarily 4.2 million shares of the Company’s
stock, and up to 1.5 million shares of the Company’s stock to
satisfy certain warrant holders’ obligation. Additional
consideration for up to $16 million in milestone payments in the
form of contingent value rights (CVRs) may be paid to Innovus
shareholders in cash or stock over the next five years if certain
revenue and profitability milestones are achieved. Innovus
specializes in commercializing, licensing and developing safe and
effective over-the-counter consumer health products. The Company
does not anticipate that this transaction will formally close until
the quarter ended March 31, 2020 and is subject to approval by the
shareholders of both the Company and Innovus.
The
Asset Purchase Agreement agreed to on October 10, 2019, between the
Company and Cerecor, caused upon the November 1, 2019 closing, the
Company to pay $4.5 million in cash, issue approximately 9.8
million shares of Series G Convertible Preferred Stock and assume
certain of Seller’s financial and royalty obligations, which
includes approximately $16.6 million of fixed payment obligations
to a third-party creditor and not more than $3.5 million of
Medicaid rebates and products returns. The Commercial Portfolio
consists of six pharmaceutical and other prescription products
competing in markets exceeding $8 billion in annual sales in the
United States. In addition, the Company will be assuming the
majority of the Cerecor’s commercial sales, commercial
contracts and customer relationship workforce.
In
addition, the Company has assumed obligations due to an investor
including fixed and variable payments. The Company assumed fixed
monthly payments equal to $0.1 million from November 2019 through
January 2021 plus $15 million due in January 2021. Monthly variable
payments due to the same investor are equal to 15% of net revenue
generated from a subset of the Product Portfolio, subject to an
aggregate monthly minimum of $0.1 million, except for January 2020,
when a one-time payment of $0.2 million is due. The variable
payment obligation continues until aggregate variable payments of
approximately $9.5 million have been made.
Further, certain of
the products in the Product Portfolio require royalty payments
ranging from 15% to 23.5% of net revenue. One of the products in
the Product Portfolio requires the Company to generate minimum
annual sales sufficient to represent annual royalties of $1.8
million.
Nasdaq Listing Compliance. The
Company’s common stock is listed on The Nasdaq Capital
Market. In order to maintain compliance with Nasdaq listing
standards, the Company
must, amongst other requirements, maintain a stockholders’
equity balance of at least $2.5 million pursuant to Nasdaq Listing
Rule 5550(b). In that regard, on September 30, 2019, the
Company’s stockholders’ equity totaled approximately
$2.3 million, thereby potentially resulting in a
stockholders’ equity deficiency upon the filing of this Form
10-Q. However, subsequent to September 30, 2019, the Company
completed (i) the Offering with the Investors, raising
approximately $9.3 million in equity financing (see Note 1), and
(ii) the “Asset Purchase Agreement” in which the
Company issued approximately 9.8 million shares of Series G
Convertible Preferred Stock worth an initial estimate of
approximately $5.6 million, resulting in an increase in
stockholders’ equity of approximately $14.8 million in the
aggregate. Accordingly, as of the filing of this Form 10-Q for the
three months ended September 30, 2019, the Company’s
stockholders’ equity balance exceeds the minimum $2.5 million
threshold and, therefore, the Company believe it is currently in
compliance with all applicable Nasdaq Listing
Requirements.
Basis of Presentation. The unaudited
consolidated financial statements contained in this report
represent the financial statements of Aytu and its wholly-owned
subsidiary, Aytu Women’s Health, LLC. The unaudited
consolidated financial statements should be read in conjunction
with Aytu’s Annual Report on Form 10-K for the year ended
June 30, 2019, which included all disclosures required by generally
accepted accounting principles in the United States
(“GAAP”). In the opinion of management, these unaudited
consolidated financial statements contain all adjustments necessary
to present fairly the financial position of Aytu and the results of
operations and cash flows for the interim periods presented. The
results of operations for the period ended September 30, 2019 are
not necessarily indicative of expected operating results for the
full year. The information presented throughout this report, as of
and for the periods ended September 30, 2019, and 2018, is
unaudited.
Adoption of New Accounting Pronouncements
Leases
(“ASU 2016-02”). In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02
– Topic 842 Leases.
ASU 2016-02 requires that most leases
be recognized on the financial statements, specifically the
recognition of right-to-use assets and related lease liabilities,
and enhanced disclosures about leasing arrangements. The objective
is to provide improved transparency and comparability among
organizations. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those
fiscal years. The standard requires using the modified
retrospective transition method and apply ASU 2016-02 either at (i)
latter of the earliest comparative period presented in the
financial statements or commencement date of the lease, or (ii) the
beginning of the period of adoption. The Company has elected to
apply the standard at the beginning period of adoption, July 1,
2019 which resulted in no cumulative adjustment to retained
earnings.
The
Company has elected to apply the short-term scope exception for
leases with terms of 12 months or less at the inception of the
lease and will continue to recognize rent expense on a
straight-line basis. As a result of the adoption, on July 1, 2019,
the Company recognized a lease liability of approximately $0.4
million, which represented the present value of the remaining
minimum lease payments using an estimated incremental borrowing
rate of 8%. As of September 30, 2019, the Company recognized a
right-to-use asset of approximately $0.4 million. Lease expense did
not change materially as a result of the adoption of ASU
2016-02.
Recently Accounting Pronouncements
Fair Value Measurements (“ASU 2018-13”).
In August
2018, the FASB issued ASU 2018-13, “Fair Value Measurement
(Topic 820) Disclosure Framework-Changes to the Disclosure
Requirements for Fair Value Measurement.” The amendments in
the standard apply to all entities that are required, under
existing GAAP, to make disclosures about recurring or nonrecurring
fair value measurements. ASU 2018-13 removes, modifies, and adds
certain disclosure requirements in ASC 820, Fair Value Measurement.
The standard is effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2019.
The amendments on
changes in unrealized gains and losses, the range and weighted
average of significant unobservable inputs used to develop Level 3
fair value measurements, and the narrative description of
measurement uncertainty should be applied prospectively for only
the most recent interim or annual period presented in the initial
fiscal year of adoption. All other amendments should be applied
retrospectively to all periods presented upon their effective date.
Early adoption is permitted upon issuance of ASU 2018-13. An entity
is permitted to early adopt any removed or modified disclosures
upon issuance of ASU 2018-13 and delay adoption of the additional
disclosures until their effective date. The Company is currently
assessing the impact that ASU 2018-13 will have on its financial
statements.
Financial
Instruments – Credit Losses (“ASU
2016-13”). In June 2016,
the FASB issued ASU 2016-13, “Financial Instruments –
Credit Losses” to require the measurement of expected credit
losses for financial instruments held at the reporting date based
on historical experience, current conditions and reasonable
forecasts. The main objective of this ASU is to provide financial
statement users with more decision-useful information about the
expected credit losses on financial instruments and other
commitments to extend credit held by a reporting entity at each
reporting date. The standard is effective for interim and annual
reporting periods beginning after December 15, 2019. Early adoption
is permitted for interim and annual reporting periods beginning
after December 15, 2018. The Company is currently assessing the
impact that ASU 2016-13 will have on its consolidated financial
statements but does not anticipate there to be a material
impact.
This
Quarterly Report on Form 10-Q does not discuss recent
pronouncements that are not anticipated to have an impact on or are
unrelated to its financial condition, results of operations, cash
flows or disclosures.
2. Revenue Recognition
The
Company sells its products principally to a limited number of
wholesale distributors and pharmacies in the United States, which
account for the largest portion of our total revenue. International
sales are made primarily to specialty distributors, as well as
hospitals, laboratories, and clinics, some of which are government
owned or supported (collectively, its “Customers”). The
Company’s Customers in the United States subsequently resell
the products to pharmacies and patients. Revenue from product sales
is recorded at the net sales price, or “transaction
price,” which includes estimates of variable consideration
that result from coupons, discounts, chargebacks and distributor
fees, processing fees, as well as allowances for returns and
government rebates.
In
accordance with ASC 606, the Company recognizes net revenues from
product sales when the Customer obtains control of the
Company’s product, which typically occurs upon delivery to
the Customer. The Company’s payment terms are between 30 to
60 days in the United States and consistent with prevailing
practice in international markets.
Revenues by Geographic
location. The following table
reflects our product revenues by geographic location as determined
by the billing address of our customers:
Revenues
by Geographic location
The
following table reflects our product revenues by geographic
location as determined by the billing address of our
customers:
|
|
Three Months
Ended
|
|
|
|
September
30,
|
|
|
|
2019
|
2018
|
|
U.S.
|
$1,262,000
|
$1,273,000
|
|
International
|
178,000
|
159,000
|
|
Total net
revenue
|
$1,440,000
|
$1,432,000
|
3. Product Licenses
The
Company currently licenses three of its existing product offerings
from third parties: (i) Natesto; (ii) ZolpiMist, and (ii) Tuzistra
XR. Each of these license agreements are subject to terms and
conditions specific to each agreement. The Company capitalized the
acquisition cost of each license, which included a combination of
both upfront considerations, as well as the estimated future
contingent consideration estimated at the acquisition date. Future
adjustments to contingent consideration for the existing products
will be recognized as an unrealized gain/loss due to the changes in
the fair value of the contingent consideration.
License and Supply Agreement—Natesto
In
April 2016, the
Company entered into a license and supply agreement to
acquire the exclusive U.S. rights to commercialize Natesto®
(testosterone) nasal gel from Acerus Pharmaceuticals Corporation,
or Acerus. The
Company acquired the rights effective upon the expiration of
the former licensee’s rights, which occurred on June 30,
2016. The term of the license runs for the greater of eight years
or until the expiry of the latest to expire patent, including
claims covering Natesto or until the entry on the market of at
least one AB-rated generic product.
In
addition to the previously disclosed upfront payments made to
Acerus, the
Company agreed to make one-time, non-refundable milestone
payments to Acerus within 45 days of the occurrence of certain
agreed upon milestones. The maximum aggregate amount payable under
such milestone payments is $37.5 million.
The
fair value of the net identifiable Natesto asset acquired was
determined to be $10.5 million, which is being amortized over eight
years. The aggregate amortization expense for each of the
three-month periods ended September 30, 2019 and 2018 was $0.3
million.
The
contingent consideration was initially valued at $3.2 million using
a Monte Carlo simulation, as of June 30, 2016. As of June 30, 2019,
the contingent consideration was revalued at $5.1 million using the
same Monte Carlo simulation methodology, and based on current
interest rates, expected sales potential, and Aytu stock trading
variables. The Company reevaluates the contingent consideration on
a quarterly basis for changes in the fair value recognized after
the acquisition date, such as measurement period adjustments. The
contingent consideration accretion expense for each of the
three-month periods ended September 30, 2019 and 2018 was $79,000,
and $15,000, respectively.
License Agreement—ZolpiMist
In June
2018, the
Company signed an exclusive license agreement for
ZolpiMist™ (zolpidem tartrate oral spray) from Magna
Pharmaceuticals, Inc., (“Magna”). This agreement allows
for the
Company ’s exclusive commercialization of ZolpiMist in
the U.S. and Canada.
The
Company made an upfront payment of $0.4 million to Magna
upon execution of the agreement. In July 2018, the Company paid an
additional $0.3 million, of which, $0.3 million was included in
current contingent consideration at June 30, 2018.
The
ZolpiMist license agreement was valued at $3.2 million and will be
amortized over the life of the license agreement up to seven years.
The amortization expense for each of the three months ended
September 30, 2019 and 2018 was $0.1 million.
The
Company also agreed to make certain royalty payments to
Magna which will be calculated as a percentage of ZolpiMist net
sales and are payable within 45 days of the end of the quarter
during which the applicable net sales occur.
The
contingent consideration related to these royalty payments was
valued at $2.6 million using a Monte Carlo simulation, as of June
11, 2018. As of June 30, 2019, the contingent consideration was
revalued at $2.3 million using the same Monte Carlo simulation
methodology, and based on current interest rates, expected sales
potential, and The
Company's stock trading variables. The Company reevaluates
the contingent consideration on a quarterly basis for changes in
the fair value recognized after the acquisition date, such as
measurement period adjustments. The contingent consideration
accretion expense for the three months ended September 30, 2019 and
2018 was $0.1 million and $0.1 million, respectively.
License, Development, Manufacturing and Supply
Agreement—Tuzistra XR
On
November 2, 2018, the Company entered into a License, Development,
Manufacturing and Supply Agreement (the “Tris License
Agreement”) with TRIS Pharma, Inc. (“TRIS”).
Pursuant to the Tris License Agreement, TRIS granted the Company an
exclusive license in the United States to commercialize Tuzistra
XR. In addition, TRIS granted the Company an exclusive license in
the United States to commercialize a complementary antitussive
referred to as “CCP-08” (together with Tuzistra XR, the
“Products”) for which marketing approval has been
sought by TRIS under a New Drug Application filed with the Food and
Drug Administration (“FDA”). As consideration for the
Products license, the Company: (i) made an upfront cash payment to
TRIS; (ii) issued shares of Series D Convertible preferred stock to
TRIS; and (iii) will pay certain royalties to TRIS throughout the
license term in accordance with the Tris License
Agreement.
The
Tris License Agreement was valued at $9.9 million and will be
amortized over the life of the Tris License Agreement up to twenty
years. The amortization expense for each of the three-month periods
ended September 30, 2019 and 2018 was $123,000 and $0,
respectively.
The
Company also agreed to make certain quarterly royalty
payments to TRIS which will be calculated as a percentage of our
Tuzistra XR net sales, payable within 45 days of the end of the
applicable quarter.
As of
November 2, 2018, the contingent consideration, related to this
asset, was valued at $8.8 million using a Monte Carlo simulation.
As of June 30, 2019, the contingent consideration was revalued at
$16.0 million using the same Monte Carlo simulation methodology,
and based on current interest rates, expected sales potential,
and the
Company's stock trading variables. The Company reevaluates
the contingent consideration on a quarterly basis for changes in
the fair value recognized after the acquisition date, such as
measurement period adjustments. The contingent consideration
accretion expense for the three months ended March 31, 2019 and
2018 was $96,000, and $0, respectively.
4. Inventories
Inventories
consist of raw materials, work in process and finished goods and
are recorded at the lower of cost or net realizable value, with
cost determined on a first-in, first-out basis. The
Company periodically reviews the composition of its
inventories to identify obsolete, slow-moving or otherwise
unsaleable items. If unsaleable items are observed and there are no
alternate uses for the inventory, The
Company will record a write-down to net realizable value in
the period that the impairment is first recognized. There was no
inventory write-down during the three months ended September 30,
2019 or September 30, 2018, respectively.
Inventory
balances consist of the following:
|
|
As
of
|
As
of
|
|
|
September
30,
|
June
30,
|
|
|
2019
|
2019
|
|
Raw
materials
|
$154,000
|
$117,000
|
|
Finished
goods
|
1,227,000
|
1,323,000
|
|
|
$1,381,000
|
$1,440,000
|
5. Fixed Assets
Fixed
assets are recorded at cost and, once placed in service, are
depreciated on a straight-line basis over the estimated useful
lives. Leasehold improvements are amortized over the shorter of the
estimated economic life or related lease term. Fixed assets consist
of the following:
|
|
|
As
of
|
As
of
|
|
|
Estimated
|
September
30,
|
June
30,
|
|
|
Useful Lives in
years
|
2019
|
2019
|
|
|
|
|
|
|
Manufacturing
equipment
|
2 - 5
|
$83,000
|
$83,000
|
|
Leasehold
improvements
|
3
|
112,000
|
112,000
|
|
Office equipment,
furniture and other
|
2 - 5
|
265,000
|
315,000
|
|
Lab
equipment
|
3 - 5
|
90,000
|
90,000
|
|
Less accumulated
depreciation and amortization
|
|
(412,000)
|
(396,000)
|
|
|
|
|
|
|
Fixed
assets, net
|
|
$138,000
|
$204,000
|
The
depreciation and amortization expense was $16 thousand and $28
thousand for the three-months ended September 30, 2019 and 2018,
respectively.
6. Leases, Right-to-Use Assets and Related Liabilities
In
September 2015, the Company entered into a 37-month operating lease
in Englewood, Colorado. This lease had an initial base rent of
$9,000 a month with a total base rent over the term of the lease of
approximately $318,000. In October 2017, the Company signed an
amendment to the 37-month operating lease in Englewood, Colorado,
extending the lease for an additional 24 months beginning October
1, 2018. The base rent remained $9,000 per month. In April 2019,
the Company extended the lease for an additional 36 months
beginning October1, 2020.
In
June 2018, the Company entered into a 12-month operating lease,
beginning on August 1, 2018, for office space in Raleigh, North
Carolina. This lease has base rent of $1,100 a month, with total
rent over the term of the lease of approximately
$13,200.
As discussed within Note 1, the Company adopted the FASB issued ASU
2016-02, “Leases
(Topic 842)” as
of July 1, 2019. With the adoption of ASU 2016-02, the Company
recorded an operating right-of-use asset and an operating lease
liability on its balance sheet associated with its lease of its
corporate headquarters. The right-of-use asset represents the
Company’s right to use the underlying asset for the lease
term and the lease obligation represents the Company’s
commitment to make the lease payments arising from the lease.
Right-of-use lease assets and obligations are recognized at the
later of the commencement date or July 1, 2019; the date of
adoption of Topic 842; based on the present value of remaining
lease payments over the lease term. As the Company’s lease
does not provide an implicit rate, the Company used an estimated
incremental borrowing rate based on the information available at
the commencement date in determining the present value of the lease
payments. Rent expense is recognized on a straight-line basis over
the lease term, subject to any changes in the lease or expectations
regarding the terms. The lease liability is classified as
current or long-term on the balance sheet.
|
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
Remaining
Office leases
|
$463,000
|
$81,000
|
$113,000
|
$118,000
|
$121,000
|
$30,000
|
$−
|
|
Less:
Discount Adjustment
|
(69,000)
|
|
|
|
|
|
|
|
Total
lease liability
|
394,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
liability - current portion
|
79,000
|
|
|
|
|
|
|
|
Long-term
lease liability
|
$315,000
|
|
|
|
|
|
|
Prior
to the adoption of ASU 2016-02, the Company recognized
deferred rent when the straight-line rent expense exceeded the
actual lease payments and reduced deferred rent when the actual
lease payments exceeded the straight-line rent expense. Deferred
rent was also classified between current and long-term on the
balance sheet.
Rent
expense for the respective periods totaled $32 thousand for the
three months ended September 30, 2019 and 2018,
respectively
7. Patents
The
cost of the oxidation-reduction potential (“ORP”)
technology related patents for the MiOXSYS Systems was $380,000
when they were acquired and are being amortized over the remaining
U.S. patent life of approximately 15 years as of the date, which
expires in March 2028. Patents consist of the
following:
|
|
As
of
|
As
of
|
|
|
September
30,
|
June
30,
|
|
|
2019
|
2019
|
|
|
|
|
|
Patents
|
$380,000
|
$380,000
|
|
Less
accumulated amortization
|
(166,000)
|
(159,000)
|
|
Patents,
net
|
$214,000
|
$221,000
|
The
amortization expense was $7 thousand for the three-months ended
September 30, 2019 and 2018, respectively.
8. Accrued liabilities
Accrued
liabilities consist of the following:
|
|
As
of
|
As
of
|
|
|
September
30,
|
June
30,
|
|
|
2019
|
2019
|
|
Accrued
accounting fee
|
$42,000
|
$85,000
|
|
Accrued
program liabilities
|
843,000
|
736,000
|
|
Accrued
product-related fees
|
133,000
|
295,000
|
|
Customer
overpayment
|
79,000
|
−
|
|
Other
accrued liabilities*
|
54,000
|
32,000
|
|
Total
accrued liabilities
|
$1,151,000
|
$1,148,000
|
* Other
accrued liabilities consist of franchise tax, samples and
consultants, none of which individually represent greater than five
percent of total current liabilities.
9. Fair Value Considerations
The
Company’s financial instruments include cash and cash
equivalents, restricted cash, accounts receivable, accounts
payable, accrued liabilities, warrant derivative liability, and
contingent consideration. The carrying amounts of financial
instruments, including cash and cash equivalents, restricted cash,
accounts receivable, accounts payable, and accrued liabilities
approximate their fair value due to their short maturities. The
fair value of the warrant derivative liability was valued using the
lattice valuation methodology. The fair value of
acquisition-related contingent consideration is based on a
Monte-Carlo methodology using estimated discounted future cash
flows and periodic assessments of the probability of occurrence of
potential future events. The valuation policies are determined by
management, and the Company’s Board of Directors is informed
of any policy change.
Authoritative
guidance defines fair value as the price that would be received to
sell an asset or paid to transfer a liability (an exit price) in an
orderly transaction between market participants at the measurement
date. The guidance establishes a hierarchy for inputs used in
measuring fair value that maximizes the use of observable inputs
and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset
or liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions of what market participants
would use in pricing the asset or liability developed based on the
best information available in the circumstances. The hierarchy is
broken down into three levels based on reliability of the inputs as
follows:
|
Level 1:
|
Inputs
that reflect unadjusted quoted prices in active markets that are
accessible to Aytu for identical assets or
liabilities;
|
|
|
|
|
Level 2:
|
Inputs
that include quoted prices for similar assets and liabilities in
active or inactive markets or that are observable for the asset or
liability either directly or indirectly; and
|
|
|
|
|
Level 3:
|
Unobservable
inputs that are supported by little or no market
activity.
|
The
Company’s assets and liabilities which are measured at fair
value are classified in their entirety based on the lowest level of
input that is significant to their fair value measurement. The
Company’s policy is to recognize transfers in and/or out of
fair value hierarchy as of the date in which the event or change in
circumstances caused the transfer. Aytu has consistently applied
the valuation techniques discussed below in all periods
presented.
The
following table presents the Company’s financial liabilities
that were accounted for at fair value on a recurring basis as of
September 30, 2019 and June 30, 2019, by level within the fair
value hierarchy.
The
warrant derivative liability was valued using the lattice valuation
methodology because that model embodies the relevant assumptions
that address the features underlying these instruments. The
warrants related to the warrant derivative liability are not
actively traded and are, therefore, classified as Level 3
liabilities. Significant assumptions in valuing the warrant
derivative liability, based on estimates of the value of the
Company’s common stock and various factors regarding the
warrants, were as follows as of issuance and as of September 30,
2019:
The
following table sets forth a reconciliation of changes in the fair
value of the derivative financial liabilities classified as Level 3
in the fair value hierarchy:
|
|
Liability
Classified Warrants
|
|
|
|
|
Balance as of
June 30, 2019
|
$13,000
|
|
Change
in fair value included in earnings
|
(2,000)
|
|
Balance as of
September 30, 2019
|
$11,000
|
The Company classifies its contingent
consideration liability in connection with the acquisition of
Natesto, Tuzistra XR and ZolpiMist within Level 3 as factors
used to develop the estimated fair value are unobservable inputs
that are not supported by market activity. The Company estimates
the fair value of our contingent consideration liability based on
projected payment dates, discount rates, probabilities of payment,
and projected revenues. Projected contingent payment amounts are
discounted back to the current period using a discounted cash flow
methodology.
The
following table sets forth a summary of changes in the contingent
consideration for the period ended September 30, 2019:
|
|
Contingent
Consideration
|
|
|
|
|
Balance as of
June 30, 2019
|
$23,326,000
|
|
Increase
due to accretion
|
229,000
|
|
Decrease
due to contractual payment
|
(46,000)
|
|
Balance as of
September 30, 2019
|
$23,509,000
|
10. Note Receivable
On
September 12, 2019, the Company announced it had entered into a
definitive merger agreement with Innovus (see Note 1) to acquire
Innovus which specializes in commercializing, licensing and
developing safe and effective over-the-counter consumer health
products. As part of the negotiations with Innovus, the Company
agreed to provide short-term, loan in the form of a $1.0 promissory
note on August 8, 2019 (the “Innovus Note”). The
Innovus Note will be used to offset a portion of the purchase price
upon closing of the Innovus Merger Agreement (see Note 1) or, in
the event the Merger Agreement does not close, is due on February
29, 2020, accruing interest at 10.0% per annum to be paid upon
principal paydown. In the event of default, the interest rate
increases to 15.0% per annum. In addition, on October 11, 2019, the
Company amended the original promissory note, providing an
additional approximately $0.4 million of bridge financing under the
same terms and conditions as the Innovus Note.
11. Commitments and Contingencies
Commitments
and contingencies are described below and summarized by the
following as of September 30, 2019:
|
|
Total
|
2020
|
2021
|
2022
|
2023
|
2024
|
Thereafter
|
|
Prescription
database
|
$1,469,000
|
$423,000
|
$534,000
|
$512,000
|
$–
|
$–
|
$–
|
|
Product
milestone payments
|
5,500,000
|
–
|
–
|
–
|
5,500,000
|
–
|
–
|
|
|
$6,969,000
|
$423,000
|
$534,000
|
$512,000
|
$5,500,000
|
$–
|
$–
|
Prescription Database
In May
2016, the Company entered into an agreement with a vendor that will
provide it with prescription database information. The Company
agreed to pay approximately $1.6 million over three years for
access to the database of prescriptions written for Natesto. The
payments have been broken down into quarterly
payments.
Milestone Payments
In
connection with the Company’s intangible assets, Aytu has
certain milestone payments, totaling $5.5 million, payable at a
future date, are not directly tied to future sales, but upon other
events certain to happen. These obligations are included in the
valuation of the Company’s contingent consideration (see Note
9).
12. Capital Structure
At
September 30, 2019 and June 30, 2018, Aytu had 17,981,904 and
17,538,071 common shares outstanding, respectively, and 3,151,148
and 3,594,981 preferred shares outstanding, respectively. The
Company has 100 million shares of common stock authorized with
a par value of $0.0001 per share and 50 million shares of
preferred stock authorized with a par value of $0.0001 per
share.
The
Company has 50 million shares of non-voting, non-cumulative
preferred stock authorized with a par value of $0.0001 per share,
of which, 400,000 are designated as Series D Convertible preferred
stock, and 2,751,148 are designated as Series E Convertible
preferred stock as of September 30, 2019. Liquidation rights for
all series of preferred stock are on an as-converted
basis.
Included
in the common stock outstanding are 2,342,604 shares of restricted
stock issued to executives, directors, employees and
consultants.
During
the quarter ended September 30, 2019, investors holding shares of
Series C preferred stock exercised their right to convert 443,833
shares of Series C preferred stock into 443,833 shares of common
stock. As of September 30, 2019, there are no remaining Series C
preferred stock outstanding.
In
October 2019, Armistice Capital converted 2,751,148 shares of
Series E Preferred Stock into 2,751,148 shares of common
stock.
13. Equity Incentive Plan
Share-based Compensation Plans
On
June 1, 2015, Aytu’s stockholders approved the Aytu
BioScience 2015 Stock Option and Incentive Plan (the “2015
Plan”), which, as amended in July 2017, provides for the
award of stock options, stock appreciation rights, restricted stock
and other equity awards for up to an aggregate of 3.0 million
shares of common stock. The shares of common stock underlying any
awards that are forfeited, canceled, reacquired by Aytu prior to
vesting, satisfied without any issuance of stock, expire or are
otherwise terminated (other than by exercise) under the 2015 Plan
will be added back to the shares of common stock available for
issuance under the 2015 Plan. As of September 30, 2019, we have
657,380 shares that are available for grant under the 2015
Plan.
Stock Options
Employee Stock Options: There were no
grants of stock options to employees during the quarters ended
September 30, 2019 and 2018, respectively, therefore, no
assumptions are used for fiscal 2019.
Stock
option activity is as follows:
|
|
Number of Options
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life in
Years
|
|
Outstanding
June 30, 2019
|
1,607
|
$325.73
|
6.13
|
|
Expired
|
(51)
|
328.00
|
–
|
|
Outstanding
September 30, 2019
|
1,556
|
325.66
|
6.08
|
|
Exercisable
at September 30, 2019
|
1,544
|
$325.64
|
6.08
|
As
of September 30, 2019, there was $2,000 of total
unrecognized option-based compensation expense related to
non-vested stock options. The Company expects to recognize this
expense over a weighted-average period of
0.12 years.
Restricted Stock
Restricted
stock activity is as follows:
|
|
Number of Shares
|
Weighted Average Grant Date Fair Value
|
Weighted Average Remaining Contractual Life in
Years
|
|
|
|
|
|
|
Unvested
at June 30, 2019
|
2,346,214
|
$1.83
|
9.1
|
|
Granted
|
–
|
–
|
–
|
|
Vested
|
–
|
–
|
–
|
|
Forfeited
|
(5,150)
|
$2.44
|
–
|
|
Unvested
at September 30, 2019
|
2,341,064
|
$1.83
|
8.8
|
During
the quarter ended September 30, 2019, 5,150 shares of restricted
stock were exchanged with common stock, and the Company recognized
an increase in aggregate stock compensation expense of
$2,600.
Under
the 2015 Plan, there was $3,755,000 of total unrecognized
stock-based compensation expense related to the non-vested
restricted stock as of September 30, 2019. The Company expects to
recognize this expense over a weighted-average period of 8.82
years.
The
Company previously issued 1,540 shares of restricted stock outside
the Company’s 2015 Plan, which vest in July 2026. The
unrecognized expense related to these shares was $1,347,000 as of
September 30, 2019 and is expected to be recognized over the
weighted average period of 6.78 years.
Stock-based
compensation expense related to the fair value of stock options and
restricted stock was included in the statements of operations as
selling, general and administrative expenses as set forth in the
table below:
|
|
Three
Months Ended September 30,
|
|
|
Selling,
general and administrative:
|
2019
|
2018
|
|
Stock
options
|
$5,000
|
$66,000
|
|
Restricted
stock
|
160,000
|
86,000
|
|
Total
stock-based compensation expense
|
$165,000
|
$152,000
|
14. Warrants
The
Company has issued equity-based warrants and liability
warrants in conjunction with equity raises.
There
were no warrants issued during the three-months ended September 30,
2019 and the three-months ended September 30, 2018.
A
summary of equity-based warrants is as follows:
|
|
Number of Warrants
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life in
Years
|
|
Outstanding
June 30, 2019
|
16,218,908
|
$3.15
|
4.36
|
|
Warrants
expired
|
–
|
–
|
–
|
|
Warrants
exercised
|
–
|
–
|
–
|
|
Outstanding
September 30, 2019
|
16,218,908
|
$3.15
|
4.11
|
A
summary of liability warrants is as follows:
|
|
Number of Warrants
|
Weighted Average Exercise Price
|
Weighted Average Remaining Contractual Life in
Years
|
|
Outstanding
June 30, 2019
|
240,755
|
$72.00
|
3.16
|
|
Warrants
expired
|
–
|
–
|
–
|
|
Warrants
exercised
|
–
|
–
|
–
|
|
Outstanding
September 30, 2019
|
240,755
|
$72.00
|
2.90
|
15. Net Loss Per Common Share.
Basic income (loss) per common share is calculated
by dividing the net income (loss) available to the common
shareholders by the weighted average number of common shares
outstanding during that period. Diluted net loss per
share reflects the potential of securities that could share in the
net loss of Aytu. Basic and diluted loss per share was the same in
2019 and 2018, they were not included in the calculation of the
diluted net loss per share because they would have been
anti-dilutive.
The following table sets-forth securities that could be potentially
dilutive, but as of the quarters ended September 30, 2019 and 2018
are anti-dilutive, and therefore excluded from the calculation of
diluted earnings per share.
|
|
|
Three Months Ended
|
|
|
|
|
September 30
|
|
|
|
|
2019
|
2018
|
|
Warrants
to purchase common stock - liability classified
|
(Note
14)
|
240,755
|
240,755
|
|
Warrant
to purchase common stock - equity classified
|
(Note
14)
|
16,218,908
|
1,641,906
|
|
Employee
stock options
|
(Note
13)
|
1,556
|
1,787
|
|
Employee
unvested restricted stock
|
(Note
13)
|
2,342,604
|
37,890
|
|
Convertible
preferred stock
|
(Note
12)
|
3,151,148
|
–
|
|
|
21,954,971
|
1,922,338
|
|
16. Subsequent Events
See
Footnotes 1, 10 and 12 for information relating to events occurring
subsequent to September 30, 2019.
Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.
This discussion should be read in conjunction with Aytu BioScience,
Inc.’s Annual Report on Form 10-K for the year ended June 30,
2019, filed on September 26, 2019. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
projected in the forward-looking statements. For additional
information regarding these risks and uncertainties, please see the
risk factors included in Aytu’s Form 10-K filed with the
Securities and Exchange Commission on September 26,
2019.
Overview, Liquidity and Capital Resources
We are
a specialty pharmaceutical company focused on commercializing novel
products that address significant patient needs such as
hypogonadism (low testosterone), cough and upper respiratory
symptoms, insomnia, and male infertility and plans to expand
opportunistically into other therapeutic areas as we continue to
execute on our growth plans.
Our
operations have historically consumed cash and are expected to
continue to require cash, but at a declining rate. We have incurred
accumulated net losses since inception, and at September 30, 2019,
we had an accumulated deficit of $111.3 million. Revenues for the
three-months ended September 30, 2019 increased slightly compared
to the three-months ended September 30, 2018, and revenues
increased 100% and 14% for each of the years ended June 30, 2019
and 2018, respectively, and is expected to continue to increase
long-term, allowing us to rely less on our existing cash and cash
equivalents, and proceeds from financing transactions. Despite
increased revenue, cash used in operations during the three-months
ended September 30, 2019 was $3.0 million compared to $2.7 million
for the three-months ended September 30, 2018, due to our focus on
market development activities.
On
October 11, 2019, we entered into Securities Purchase Agreements
(the “Purchase Agreement”) with two institutional
accredited investors (the “Investors”) providing for
the issuance and sale by the Company (the “Offering”)
of $10.0 million of, (i) shares of the our Series F Convertible
Preferred Stock (the “Preferred Stock”) which are
convertible into shares of common stock (the “Conversion
Shares”) and (ii) warrants (the “Warrants”) which
are exercisable for shares of common stock (the “Warrant
Shares”). The Warrants have an exercise price equal to $1.25
and contain cashless exercise provisions. Each Warrant will be
exercisable after we obtain stockholder approval as required by
applicable Nasdaq rules (“Shareholder Approval”) and
will expire five years from the time a registration statement
covering the Conversion Shares and Warrant Shares is declared
effective by the Securities and Exchange Commission. The closing of
the sale of these securities occurred on October 16,
2019.
The
net proceeds we received from the Offering were approximately $9.3
million. The net proceeds we receive from the Offering will be used
for general corporate purposes, including working
capital.
As of
the date of this Report, we expect our commercial costs for current
operation to remain approximately flat or to increase modestly as
we continue to focus on revenue growth. Our current asset position
of $31.0 million plus the proceeds expected from ongoing product
sales will be used to fund operations. We will access the capital
markets to fund operations if and when needed, and to the extent it
becomes probable that existing cash and cash equivalents, and other
current assets may become exhausted. The timing and amount of
capital that may be raised is dependent on market conditions and
the terms and conditions upon which investors would require to
provide such capital. There is no guarantee that capital will be
available on terms that we consider to be favorable to us and our
stockholders, or at all. However, we have been successful in
accessing the capital markets in the past and is confident in our
ability to access the capital markets again, if needed. Since we do
not have sufficient cash and cash equivalents on-hand as of
September 30, 2019 to cover potential net cash outflows for the
twelve months following the filing date of this Quarterly Report,
ASU 2014-15, Presentation of Financial Statements—Going
Concern (Subtopic 205-40) requires us to report that there exists
an indication of substantial doubt about our ability to continue as
a going concern.
If we
are unable to raise adequate capital in the future when it is
required, we can adjust our operating plans to reduce the magnitude
of the capital need under its existing operating plan. Some of the
adjustments that could be made include delays of and reductions to
the Company’s commercial programs, reductions in headcount,
narrowing the scope of our commercial efforts, or reductions to our
research and development programs. Without sufficient operating
capital, we could be required to relinquish rights to products or
renegotiate to retain such rights on less favorable terms than it
would otherwise choose. This may lead to impairment or other
charges, which could materially affect our balance sheet and
operating results.
Nasdaq Listing Compliance. Our common
stock is listed on The Nasdaq Capital Market. In order to maintain
compliance with Nasdaq listing standards, we must, amongst other requirements,
maintain a stockholders’ equity balance of at least $2.5
million pursuant to Nasdaq Listing Rule 5550(b). In that regard, on
September 30, 2019, the our stockholders’ equity totaled
approximately $2.3 million, thereby potentially resulting in a
stockholders’ equity deficiency upon the filing of this Form
10-Q. However, subsequent to September 30, 2019, we completed (i)
the Offering with the Investors, raising approximately $9.2 million
in equity financing (see Note 1), and (ii) the “Asset
Purchase Agreement” in which we issued approximately 9.8
million shares of Series G Convertible Preferred Stock worth an
initial estimate of approximately $5.6 million, resulting in an
increase in stockholders’ equity of approximately $14.8
million in the aggregate. Accordingly, as of the filing of this
Form 10-Q for the three months ended September 30, 2019, our
stockholders’ equity balance exceeds the minimum $2.5 million
threshold and, therefore, we believe we are currently in compliance
with all applicable Nasdaq Listing Requirements.
Strategic Growth Initiatives
Pursuant to our
strategy of identifying and acquiring complimentary assets, we have
entered into two transactions that will substantially increase the
revenue generating capacity of the Company and provide
opportunities to reduce the combined operating costs of Aytu. The
dual impact of the transactions on revenue and operating expenses
is expected to position the Company to achieve positive cash flow
earlier than previously expected.
During
the three months ended September 30, 2019 and during the subsequent
period thereafter, we entered into both (i) a definitive merger
agreement (the “Merger Agreement”) between the Company
and Innovus Pharmaceuticals, Inc. (“Innovus”) on
September 12, 2019, and (ii) an asset purchase agreement (the
“Asset Purchase Agreement”) between the Company and
Cerecor, Inc. (“Cerecor”) to purchase and acquire
certain of Cerecor’s pediatric and primary care product lines
(the “Commercial Portfolio”) on October 10,
2019.
The
Merger Agreement between Aytu and Innovus will cause, upon closing
of the merger, for the Aytu retire all of the outstanding common
stock of Innovus for an aggregate of up to $8 million in shares of
the our common stock, less certain deductions (includes
approximately $1.4 million in cash borrowed by Innovus from Aytu
during this time period (see Note 10)). This initial consideration
to Innovus common shareholders is estimated to consist of primarily
4.2 million shares of the our stock, and up to 1.5 million shares
of the our stock to satisfy certain warrant holders’
obligation. Additional consideration for up to $16 million in
milestone payments in the form of contingent value rights (CVRs)
may be paid to Innovus shareholders in cash or stock over the next
five years if certain revenue and profitability milestones are
achieved. Innovus specializes in commercializing, licensing and
developing safe and effective over-the-counter consumer health
products. We do not anticipate that this transaction will formally
close until the quarter ended March 31, 2020 and is subject to
approval by the shareholders of both Aytu and Innovus.
The
Asset Purchase Agreement between Aytu and Cerecor caused upon the
November 1, 2019 closing, Aytu to pay $4.5 million in cash,
issuance of $9.8 million shares of convertible preferred stock and
assumed certain of Seller’s financial and royalty
obligations, which include approximately $16.6 million of fixed
payment obligations to a third-party creditor and not more than
$3.5 million of Medicaid rebates and products returns. The
Commercial Portfolio consists of five pharmaceutical prescription
products competing in markets exceeding $8 billion in annual sales
in the United States. In addition, the Company will be assuming the
majority of the Cerecor’s commercial sales, commercial
contracts and customer relationship workforce.
In
addition, we assumed obligations due to an investor including fixed
and variable payments. We assumed fixed monthly payments equal to
$0.1 million from November 2019 through January 2021 plus $15
million due in January 2021. Monthly variable payments due to the
same investor are equal to 15% of net revenue generated from a
subset of the Product Portfolio, subject to an aggregate monthly
minimum of $0.1 million, except for January 2020, when a one-time
payment of $0.2 million is due. The variable payment obligation
continues until aggregate variable payments of approximately $9.5
million have been made.
Further, certain of
the products in the Product Portfolio require royalty payments
ranging from 15% to 23.5% of net revenue. One of the products in
the Product Portfolio requires us to generate minimum annual sales
sufficient to represent annual royalties of $1.8
million.
ACCOUNTING POLICIES
Significant Accounting Policies and Estimates
Our
consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America. The preparation of the consolidated financial
statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements, and the reported
amounts of expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including
those related to recoverability and useful lives of long-lived
assets, stock compensation, valuation of derivative instruments,
allowances, contingencies and going concern. Management bases its
estimates and judgments on historical experience and on various
other factors that the Company believes to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of assets and liabilities that
are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions. The methods, estimates, and judgments used by us in
applying these critical accounting policies have a significant
impact on the results we report in our consolidated financial
statements. Our significant accounting policies and estimates are
included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2019, filed with the SEC on September 26,
2019.
Information
regarding our accounting policies and estimates can be found in the
Notes to the consolidated Financial Statements.
Newly Issued Accounting Pronouncements
Information
regarding the recently issued accounting standards (adopted and
pending adoption as of September 30, 2019) are presented in Note 1
to the consolidated financial statements.
RESULTS OF OPERATIONS
Results of Operations – Three months ended September 30, 2019
compared to September 30, 2018
|
|
Three Months Ended
|
|
|
|
|
September 30,
|
|
|
|
|
2019
|
2018
|
Change
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Product
revenue, net
|
$1,439,826
|
$1,431,809
|
$8,017
|
|
Total
product revenue
|
1,439,826
|
1,431,809
|
8,017
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Cost
of sales
|
375,720
|
410,959
|
(35,239)
|
|
Research
and development
|
78,020
|
155,878
|
(77,858)
|
|
Selling,
general and administrative
|
5,146,443
|
3,576,580
|
1,569,863
|
|
Selling,
general and administrative - related party
|
–
|
253,709
|
(253,709)
|
|
Amortization
of intangible assets
|
575,117
|
451,957
|
123,160
|
|
Total
operating expenses
|
6,175,300
|
4,849,083
|
1,326,217
|
|
|
|
|
|
|
Loss
from operations
|
(4,735,474)
|
(3,417,274)
|
(1,318,200)
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
Other
(expense), net
|
(195,386)
|
(76,561)
|
(118,825)
|
|
Gain
from warrant derivative liability
|
1,830
|
47,352
|
(45,522)
|
|
Total
other (expense) income
|
(193,556)
|
(29,209)
|
(164,347)
|
|
|
|
|
|
|
Net loss
|
$(4,929,030)
|
$(3,446,483)
|
$(1,482,547)
|
Product revenue. We recognized net revenue from product sales of
$1.4 million for the three months ended September 30, 2019 and 2018
respectively. Our product portfolio includes Natesto, Tuzistra XR,
ZolpiMist, and the MiOXSYS System.
Cost of sales. The cost of sales of
$376,000 and $411,000 recognized for the three months ended
September 30, 2019 and 2018, respectively, are related to Natesto,
Tuzistra XR, ZolpiMist, and the MiOXSYS System. We expect cost of
sales to increase in the future due to and in line with growth in
revenue from product sales, however, the decline in costs of sales
was the result of efforts to improve product
margins.
Research and Development. Research and
development expenses decreased $78,000, or 49.9%, for the three
months ended September 30, 2019 compared to the three months ended
September 30, 2018. The decrease was due primarily to a decrease in research and development costs
associated with the MiOXSYS System. We anticipate research
and development expense to slightly increase in fiscal 2020 as we
anticipate funding a study to further support the clinical
application of our MiOXSYS System.
Selling, General and Administrative.
Selling, general and administrative
costs increased $1.6 million, or 43.9%, for the three months ended
September 30, 2019 compared the three months ended September 30,
2018. The primary increase was due to sales and marketing
expenses related to launching Tuzistra XR, labor, occupancy,
travel, expanding our commercial team, and stock-based
compensation.
Selling, General and
Administrative – Related Party. Selling, general and administrative costs –
related party are relates to the cost of a services provided by
TrialCard, of which one of our Directors, Mr. Donofrio, was an
employee during the quarter ended September 30, 2018. Mr. Donofrio
is no longer an employee of TrialCard.
Amortization of Intangible Assets.
Amortization expense for the remaining intangible assets was
$575,000 and $452,000 for the for the three months ended September
30, 2019 and 2018, respectively. This expense is related to
corresponding amortization of our finite-lived intangible
assets.
Liquidity and Capital Resources
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Net
cash used in operating activities
|
(2,987,817)
|
(2,744,485)
|
|
Net
cash used in investing activities
|
(1,042,103)
|
(303,177)
|
|
Net
cash provided by financing activities
|
–
|
–
|
Net Cash Used in Operating Activities
During the three months ended September 30, 2019,
our operating activities used $3.0 million in cash, which was less
than the net loss of $4.9 million, primarily as a result of the
non-cash depreciation, amortization and accretion, stock-based
compensation, a decrease in prepaid expenses and an increase in
accrued compensation.
During
the three months ended September 30, 2018, our operating activities
used $2.7 million in cash. Our cash use was a result of an increase
in accrued liabilities and accrued compensation expense, with the
recognition of non-cash expenses such as depreciation, amortization
and accretion and stock-based compensation expense. These were
offset by derivative income, an increase in accounts receivable and
prepaid expenses.
Net Cash Used in Investing Activities
During
the three months ended September 30, 2019, we issued a $1.0 million
note receivable to Innovus and we paid $42,000 in contingent
consideration.
During
the three months ended September 30, 2018, we used $306,000 of cash
for investing activities to purchase fixed and operating assets and
received a $3,000 refund of our deposit for office
space.
Net Cash from Financing Activities
Net
cash provided by financing activities in the three months ended
September 30, 2019 was zero.
Net
cash provided by financing activities in the three months ended
September 30, 2018 was zero.
Off Balance Sheet Arrangements
We do
not have off-balance sheet arrangements, financings, or other
relationships with unconsolidated entities or other persons, also
known as “variable interest entities.”
Contractual Obligations and Commitments
Information
regarding our Contractual Obligations and Commitments is contained
in Note 11 to the Financial
Statements.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk.
We
are not currently exposed to material market risk arising from
financial instruments, changes in interest rates or commodity
prices, or fluctuations in foreign currencies. We have not
identified a need to hedge against any of the foregoing risks and
therefore currently engages in no hedging activities.
Item 4. Controls and
Procedures.
As
of the end of the period covered by this Quarterly Report on Form
10-Q, an evaluation was carried out by our management, with the
participation of the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended, or the Exchange
Act. Based on such evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and are
operating in an effective manner.
Changes in Internal Control over Financial Reporting
There
were no changes in our internal controls over financial reporting
that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings.
We are
currently not a party to any material pending legal
proceedings.
Item 1A. Risk
Factors.
You should carefully consider the risk factors discussed in Part I,
Item 1A. “Risk Factors” in our Annual Report, which
could materially affect our business, financial condition, cash
flows or future results. There have been no material changes in our
risk factors included in our Annual Report. The risk
factors in our Annual Report are not the only risks facing our
Company. Additional risks and uncertainties not currently known to
us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition or future
results.
There is no guarantee that
the recent merger between the Company and Innovus and acquisition
of Cerecor (collectively,
the “Acquisitions”) will prove successful and that we
will be able to become profitable
post-acquisitions.
In
order to make the Acquisitions successful, we will need to both
continue to achieve revenue growth and reduce overall costs and
cash burn through efficiencies. There is no guarantee that we will
be successful in achieving these goals, both due to the competitive
marketplace our products compete in, coupled with the fact that
there are certain minimum required costs necessary to support our
products and continue to increase market share.
The Acquisitions could result in operating difficulties, dilution,
and other consequences that may adversely affect our business and
results of operations.
The
Acquisitions are important elements of our overall corporate
strategy and use of capital, and these transactions could be
material to our financial condition and results of operations.
Effecting these strategic transactions could create unforeseen
operating difficulties and expenditures. The areas where we face
risks include, among others:
●
Diversion
of management time and focus from operating our business to
challenges related to the Acquisitions and other strategic
transactions.
●
Failure
to successfully develop the acquired businesses or
products.
●
Implementation
of controls, procedures, and policies of the acquired
company.
●
Integration
of the acquired company’s accounting, human resource, and
other administrative systems, and coordination of manufacture,
sales, and marketing functions.
●
Transition
of operations, manufacturers, and customers.
●
Cultural
challenges associated with integrating employees form the acquired
companies into our organization, and retention of employees from
the businesses we acquire.
●
Known
and unknown liabilities for activities of the acquired company
before the acquisition.
●
Litigation
or other claims in connection with the acquired company, including
claims from terminated employees, customers, former stockholders,
and other third parties.
Our
failure to address these risks or other problems encountered in
connection with the Acquisitions and other strategic transactions
could cause us to fail to realize their anticipated benefits, incur
unanticipated liabilities, and harm our business
generally.
The
Acquisitions and other strategic transactions could also result in
dilutive issuances of our equity securities, the incurrence of
debt, contingent liabilities, or amortization expenses, or
impairment of goodwill and/or purchased long-lived assets, and
restructuring charges, any of which could harm our financial
condition or results. Also, the anticipated benefits or value of
our acquisitions and other strategic transactions may not
materialize. In connection with past divestitures, we have agreed,
and may in the future agree, to provide indemnification for certain
potential liabilities, which may adversely affect our financial
condition or results.
We may not be able to realize anticipated cost synergies from the
pending acquisition.
The
success of the pending acquisitions will depend, in part, on our
ability to realize anticipated cost synergies. Our success in
realizing these cost synergies, and the timing of this realization,
depends on the successful integration of our business and
operations with the acquired business and operations. Even if we
are able to integrate the acquired businesses and operations
successfully, this integration may not result in the realization of
the full benefits of the cost synergies of the pending acquisition
that we currently expect within the anticipated time frame or at
all.
If we are unable to consummate the pending Acquisitions, our stock
price may be adversely affected and our financial condition may
materially suffer.
If the Acquisitions are not completed for any reason, the trading
price of our common stock may decline to the extent that the market
price of our common stock reflects positive market assumptions that
the Acquisitions will be completed and the related benefits will be
realized. In addition, if the Acquisitions are not completed our
financial condition could materially suffer, including, but not
limited to:
●
limiting our ability to obtain additional financing in the future
for working capital, capital expenditures and
acquisitions;
●
limiting our flexibility to plan for and adjust to changing
business and market conditions and increasing our vulnerability to
general adverse economic and industry conditions; and
●
potential disruption to our business and distraction of our
workforce and management team
We will incur substantial transaction fees and costs in connection
with the pending Acquisitions.
We expect to incur a significant amount of non-recurring expenses
in connection with the pending Acquisitions, including legal,
accounting, financial advisory and other expenses. Additional
unanticipated costs may be incurred following consummation of
thepending Acquisitions in the course of the integration of our
businesses with that of Innovus and Cerecor. We cannot be certain
that the elimination of duplicative costs or the realization of
other efficiencies related to the integration of the businesses
will offset the transaction and integration costs in the near term,
or at all.
We cannot assure you that the common stock will remain listed on
the NASDAQ Capital Market.
The common stock is currently listed on the NASDAQ Capital
Market. Although we currently meet the listing standards of
the NASDAQ Capital Market, we cannot assure you that we will be
able to maintain the continued listing standards of the NASDAQ
Capital Market. If we fail to satisfy the continued listing
requirements of the NASDAQ Capital Market, such as the corporate
governance requirements, minimum bid price requirement or the
minimum stockholder’s equity requirement, the NASDAQ Capital
Market may take steps to de-list our common stock. If we are
delisted from the NASDAQ Capital Market then our common stock will
trade, if at all, only on the over-the-counter market, such as the
OTC Bulletin Board securities market, and then only if one or more
registered broker-dealer market makers comply with quotation
requirements. In addition, delisting of our common stock could
depress our stock price, substantially limit liquidity of our
common stock and materially adversely affect our ability to raise
capital on terms acceptable to us, or at all. Delisting from the
NASDAQ Capital Market could also have other negative results,
including the potential loss of confidence by suppliers and
employees, the loss of institutional investor interest and fewer
business development opportunities.
Item 2. Unregistered Sales of
Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior
Securities.
None.
Item 4. Mine Safety
Disclosures.
Not
Applicable.
Item 5. Other
Information.
Item 6. Exhibits.
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Exhibit Number
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Description
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Agreement
and Plan of Merger dated September 12, 2019 (Incorporated by
reference to Exhibit 2.1 of the Registrant's Current Report on Form
8-K filed September 18, 2019)
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Certificate
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Certificate
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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Certificate
of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002*.
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101
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XBRL
(eXtensible Business Reporting Language). The following materials
from Aytu BioScience, Inc.’s Quarterly Report on Form 10-Q
for the quarter ended September 30, 2019 formatted in XBRL: (i) the
Consolidated Balance Sheet, (ii) the Consolidated Statement of
Operations, (iii) the Consolidated Statement of Stockholders’
Equity (Deficit), (iv) the Consolidated Statement of Cash Flows,
and (v) the Consolidated Notes to the Financial
Statements.
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*
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The
certification attached as Exhibit 32.1 accompanying this
Quarterly Report on Form 10-Q pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, shall not be deemed “filed”
by the Registrant for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
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SIGNATURES
Pursuant to the
requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
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AYTU
BIOSCIENCE, INC.
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By:
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/s/ Joshua
R. Disbrow
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Joshua R. Disbrow
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Chief Executive Officer (principal executive officer)
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Date: November 14, 2019
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By:
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/s/ David
A. Green
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David A. Green
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Chief Financial Officer (principal financial and accounting
officer)
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Date: November 14, 2019
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27